When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke’s experience was different. In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. The officials had the seller’s number because he had previously promised to renovate the property and had failed to follow through.
German house prices in 2012 represented a 10 percent decrease in real terms compared to thirty years ago. That is a particularly astounding performance compared to the UK, where real prices rose by more than 230 percent in the same period.
During the Golden Age, productivity increases almost immediately translated into wage increases. As technology made workers more productive, their wages went up commensurately. Since 1982, technology and productivity have continued their inexorable rise, but wages have not reflected that growth. The benefits of productivity increases have gone instead to the richest segments of society, or more precisely to the owners of assets, to those who own stocks, bonds, or real estate.
Unemployment and bankruptcies soared; businessmen, politicians, and unions pleaded for a rate cut, but Paul Volcker and Nigel Lawson were implacable in their conviction that pain was necessary in order to crush inflationary expectations. Economists have long recognized the relationship between unemployment and inflation. When workers fear for their jobs, they don’t ask for raises.
Reagan, Thatcher, Volcker, and Lawson succeeded beyond their wildest dreams. Inflation, which hit 13 percent in 1980, has only exceeded 5 percent once since 1983 and generally has been under 3 percent. Labor’s demand for cost of living increases sparked the 1970s inflationary spiral, and once wages stopped going up, so did inflation.
Technological advances ensure that each year we can make more stuff with less labor and capital than the year before. This has not changed. What has changed is how we allocate the benefits of progress. Back in the day, workers got the money; today, owners of assets do. Stagnant wages and higher stock prices are two sides of the same coin.
If they wanted to drive down rents, government could fund the construction of public housing, as they did during the Golden Age. More quality housing would increase its stock, and with supply rising to meet demand, prices would fall. This would be great for young renters, bad for middle-aged property owners, bad for banks.
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